Wednesday, January 19, 2011

In full disclosure, I've seen a lot of "DeMark" timing indicators on the internets (sic) the past few years, but have never studied it nor know much about it - more or less it is Greek to me. But in case the market has a 11% or so drop in the coming month(s) let's put this out there so we can look back and realize we need to study up on the subject. In normal times, with a market up 7 weeks in a row, it would seem sensible to say we get at least a 3-5% correction. 11% seems almost unthinkable in the current 'teflon' environment. But with short sellers wiped out and cowering in fear, any significant selling won't have short sellers covering to buttress the move.

U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.

DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.

“I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”

On a weekly basis, the two indicators signaled on Jan. 14 that a reversal is imminent as the S&P 500 closed at its highest level since August 2008. DeMark expects a decline of at least 11 percent because his work shows that markets move in increments of 5.56 percent, he said. Assuming a drop twice that size is “a conservative estimate,” he said.

The indicators are based on comparisons of the current closing level of the index with closing and intraday levels over previous periods. The reading Jan. 14 was the first signal of a reversal in the S&P 500 since March 2009, when the indicators showed a rebound was imminent, he said. That month the S&P 500 fell to a 12-year low from which it has rebounded more than 90 percent.

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